On July 4, President Donald Trump signed into law a sweeping tax reconciliation bill known as the One Big Beautiful Bill Act (OBBBA). The legislation followed weeks of negotiations and passed narrowly in both the Senate and House before reaching the President’s desk. With its enactment, tax-exempt organizations now face a host of changes that could significantly affect operations, planning, and funding strategies. The OBBBA introduces a mix of tax cuts and tax increases that impact nearly every sector of the economy, including nonprofits, higher education institutions, and charitable organizations. Below is an overview of key provisions with direct implications for the tax-exempt sector.

Section 4960: Excise Tax on High Compensation

The scope of the Section 4960 excise tax has expanded. Previously, the tax applied only to the five most highly compensated employees at a tax-exempt organization. Under the new law, all employees and former employees are included if they receive more than $1 million in annual compensation, or if they are granted certain severance benefits. This provision applies to tax years beginning after December 31, 2025.

• Organizations paying compensation above $1 million to more than five employees will see a greater tax burden.
• Planning opportunities exist to restructure compensation and severance agreements before the provision takes effect.
• Exceptions for licensed medical professionals providing medical services and non-highly compensated employees remain in place.

Section 4968: Changes to the “Endowment Tax”

The excise tax on net investment income for certain higher education institutions now follows a tiered structure rather than a flat rate:

• Over $500,000 but not exceeding $750,000 per student: 1.4%
• Over $750,000 but not exceeding $2 million per student: 4%
• Over $2 million per student: 8%

Additionally, the threshold for being considered an “applicable educational institution” was raised from 500 to 3,000 tuition-paying students, narrowing the number of schools subject to the tax. Institutions will also need to account for new definitions of gross investment income, including student loan interest and certain federally subsidized royalties.

Energy Credits and Direct Pay

The OBBBA retains the ability for tax-exempt organizations to receive direct cash payments for qualifying clean energy credits under Section 6417. However, many credits have been curtailed or eliminated, including credits for EV chargers, clean commercial vehicles, and certain renewable energy projects not begun by 2026. Organizations with planned clean energy projects may want to accelerate timelines to take advantage of current incentives.

Employee Retention Credit (ERC) Adjustments

The legislation imposes new limits on ERC claims. Refunds are barred for claims filed after January 31, 2024, unless already processed by the IRS. In addition, the statute of limitations on ERC claims has been extended to six years, with higher penalties for promoters and preparers of improper claims.

Charitable Contribution Deductions

The OBBBA introduces new floors on charitable deductions:

• Corporations: Only contributions exceeding 1% of taxable income are deductible (up to the existing 10% cap).
• Individuals: Only contributions exceeding 0.5% of adjusted gross income qualify. The value of itemized deductions is also capped at the 35% tax bracket, effectively creating a 2% tax on charitable gifts for top earners.

At the same time, the act permanently reinstates a partial charitable deduction for non-itemizers, with limits of $2,000 for joint filers and $1,000 for other taxpayers. This could encourage additional giving among individuals who do not itemize deductions.

Other Key Provisions

• Scholarship-Granting Organizations: The act allows individuals to claim a credit for contributions to qualifying scholarship funds, subject to state participation and oversight.
• SALT Deduction Cap: The state and local tax deduction cap temporarily rises to $40,000 for joint filers in 2025, phasing out for higher-income taxpayers, before reverting to $10,000 in 2030.

Next Steps for Nonprofits

While some of the most restrictive provisions originally proposed were removed from the final law, the OBBBA still represents a significant shift in the landscape for tax-exempt organizations. Nonprofits, higher education institutions, and charitable entities should carefully evaluate how the new rules will affect their funding, compensation structures, and tax positions in the coming years. At Cavanaugh & Co., our team of certified public accountants in Sarasota is here to help nonprofits and other tax-exempt organizations navigate these changes with confidence. If you are looking for guidance from experienced Sarasota CPAs, or simply searching for a “CPA near me” who understands the nonprofit sector, we are ready to assist. Contact us today to discuss how these changes may impact your organization.